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The Creation of Sustainable Business in Russia's Nuclear Cities

Juan Matthews

Tacis Project on Innovation Centers and Science Cities

INTRODUCTION

Over the last two years, the Tacis project on Innovation Centers and Science Cities has been working with four Russian scientific cities:

Obninsk—Russia's first Naukograd. Obninsk is a nuclear city centered around the Institute for Physics and Power Engineering of the Ministry for Atomic Energy (Minatom), but with 15 institutes covering advanced materials, medical radiology, meteorology, radiation chemistry, agricultural ecology, and technical education.

Reutov—adjacent to Moscow on the west and home of the MashinoStroyenia Research and Production Association, developer and manufacturer of civil and military aerospace hardware. Now MashinoStroyenia is diversifying into environmental equipment and information technology.

Koltsovo—close to Akademgorodok and home to the State Research Center for Virology and Biotechnology, Vector. Vector was formerly part of Biopreparat, the state civil and military bioproduction organization, but is now an internationally recognized center for virology and a developing cluster for pharmaceuticals.

Troitsk—another nuclear city close to Moscow and home to TRINITI (Troitsk Institute for Innovative and Thermonuclear Research), the Minatom center for civil and military thermonuclear research. Troitsk also has



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Page 101 The Creation of Sustainable Business in Russia's Nuclear Cities Juan Matthews Tacis Project on Innovation Centers and Science Cities INTRODUCTION Over the last two years, the Tacis project on Innovation Centers and Science Cities has been working with four Russian scientific cities: Obninsk—Russia's first Naukograd. Obninsk is a nuclear city centered around the Institute for Physics and Power Engineering of the Ministry for Atomic Energy (Minatom), but with 15 institutes covering advanced materials, medical radiology, meteorology, radiation chemistry, agricultural ecology, and technical education. Reutov—adjacent to Moscow on the west and home of the MashinoStroyenia Research and Production Association, developer and manufacturer of civil and military aerospace hardware. Now MashinoStroyenia is diversifying into environmental equipment and information technology. Koltsovo—close to Akademgorodok and home to the State Research Center for Virology and Biotechnology, Vector. Vector was formerly part of Biopreparat, the state civil and military bioproduction organization, but is now an internationally recognized center for virology and a developing cluster for pharmaceuticals. Troitsk—another nuclear city close to Moscow and home to TRINITI (Troitsk Institute for Innovative and Thermonuclear Research), the Minatom center for civil and military thermonuclear research. Troitsk also has

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Page 102 nine other institutes, mainly affiliated with the Russian Academy of Sciences, which are involved in a wide range of physical science work. The Tacis project has been working with federal and regional government to develop policies on science cities, but more importantly to this conference, the major effort has been in working directly with R&D institutes and with local innovation infrastructure to develop methodologies to release the commercial potential of the science base and promote new business. Experts from the European Union, from Russian academies and consultancies, and from local organizations were used to carry out the work. About 200 local staff in institutes and innovation support centers were given training, new equipment was provided to support the innovation infrastructure, direct support on commercial development was given to six selected institutes, and nine demonstration projects were carried out on commercial development. The final result included three new joint venture companies, two nonprofit partnerships between R&D organizations and industry, and significant restructuring in three institutes to assist their commercial development. The methodology and training materials were published in Russian in a series of books produced by the project, and the material on commercial development of R&D organizations is available in HTML form and will be put on the Internet in Russian and English for free access. SUSTAINABLE DEVELOPMENT Sustainability may have become a somewhat clichéd expression, but it is the most important principle here. Either the nuclear cities are to survive or they are to be obliterated in a costly process of withdrawal—costly in both economic and human terms. Sustainability means finding ways that allow development to continue without long-term external support. In real terms, sustainability means two things: commercial development of the intellectual property (IP) and capabilities in the cities flow of cash back to the infrastructure of the cities and to the institutes that generate the long-term science and technology potential Exploitation of IP in small businesses is not all that is required to initiate and sustain innovation. A brief look at successful clusters in the United States and Europe will show that this is the case. These clusters are based on centers of science and technology education and R&D— Stanford, MIT, Oxford, Cambridge, among others—combined with good infrastructure and communications. In the West the drivers for technological development are our universities and, to a lesser extent, national

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Page 103 laboratories. The research laboratories of large corporations and innovation enterprises feed off the flow of ideas and staff from the universities. Constrain or close down the universities, and the whole of the scientific infrastructure will die. The situation in Russia is different. A historical accident has resulted in the separation of university education and scientific research to a large extent. This happened before the Soviet period, but the system of separate research institutes suited the requirements of a centrally planned economy. All science cities are based on one or more state research institutes. Some of the larger science cities also have educational institutes that usually serve the requirements of the research organizations. Scientific production and services are often closely located to R&D institutes, and some R&D institutes have a primary or secondary production role. The universities are found elsewhere in Russia's large cities and have very limited scope for research; hence, both the student body and the teaching staff are isolated from the realities of industry and research. To create sustainable business, mechanisms are needed to bring together R&D with sources of young bright staff and the generation of a body of people with the commercial skills needed to create innovation businesses. In the rest of the presentation we will look at aspects of such mechanisms. CULTURAL CHANGE IN R&D ORGANIZATIONS This project was preceded by a project entitled Science and Technology Development in the Russian Market Economy, which was carried out between 1995 and 1998. That project focused on the development of innovation management policies and the creation of innovation centers in four cities—Tomsk, Novosibirsk, Samara, and Zelenograd. Although the innovation centers were successfully set up, little progress was made in attracting new business from local R&D institutions. The reason for this was the poor development of commercial understanding in these institutions. Consequently the current project has devoted a lot of its time to cultural change in institutions. One of the two consortium members running the project is AEA Technology plc, a large publicly quoted technology services company created from a government R&D organization with several research centers in the United Kingdom, the UK Atomic Energy Authority. The successful creation and development of AEA Technology depended heavily on a top-down cultural change process that required the commitment of every staff member. The experience from this was invaluable in convincing directors of Russian R&D institutions of the benefits of commercialization. The first step in working with the Russian institutes was to do an appraisal. The appraisal process was not just a technology audit but also

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Page 104 an in-depth understanding of the systems and culture. The method used for the appraisal was a workshop with the director and main officials of the organization at which information was collected to establish an institutional development profile covering 10 critical areas: 1. Purposes and aims (strategy) —does the institute know where it is going? 2. Leadership—is the institute led or is it administered as part of a bureaucracy? 3. External factors—is the institute to some extent controlling its destiny? 4. Culture—is the institute culture suitable for the future? 5. Capabilities—what is the status of the skills of the staff and the facilities? 6. Individual needs (motivation) —are the staff content and working well? 7. Systems—are there adequate systems in place to enable the institute to function properly? 8. Management—what is the quality of the management? 9. Structure (organizational) —is there a clear structure that is suitable for the future? 10. Commercial understanding—are there staff trained in commercial processes? In all, 15 institutes were appraised and their directors given appraisal reports that also gave some outline indication for development priorities. The six institutes selected for participation in the full project were chosen on the basis of a range of development levels to provide a good range of models for the output of the project. The appraisal reports were used with the selected institutes as a basis to form strategic plans and to identify the main areas for cultural change. In almost all cases the institutes were strong in capabilities, leadership, and purposes, but were all poor on commercial understanding and had a culture that was not suitable for the future in a market economy. Producing cultural change relies on commitment from the director of the institute, and one selection criterion was the willingness of the director to participate. In looking at institutes in the cities, a number were found where it was clear the director did not want to change the culture even if funding levels were making the management of the institute impossible and even if there was pressure from management and staff for change. No institutes in this situation participated in the project. It quickly became clear that the degree of development was not to extend to privatization, but the requirement was to create an extra income flow to exploit the IP and capabilities of the institute, and that is what the project concentrated on achieving. Models of varying stages of development were

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Page 105 available from European experience with large publicly funded research organizations. Figure 1 below shows the stages of commercial development of government-funded R&D institutions and compares them to the development of a selection of European examples of R&D centers: Strategic planning workshops and mentoring were used with institutes to determine the degree of commercial development required and to set actions for the program. Initially the institutes were mostly in the mission-led or market-testing stages. The task was to take them to the market-oriented stage, that is, to restructure them to introduce commercially oriented departments while retaining a state-funded R&D core. In the future the larger institutes will face the decision for further development by detaching the commercial activities or, in one case, to privatize the whole of the activities. Cultural change was then encouraged through specific workshops to build commercial skills and attitudes. In three cases, organizational changes were carried out at this stage to reinforce the cultural change. Topics included in the cultural change program were team building, business planning, strategic marketing, negotiation skills, pricing, project management, and the management of risk. In one case where the institute was expecting a major change to be imposed on it in about 18 months, it requested a series of more detailed cultural change seminars covering the 10 topics from the original appraisal. Image: jpg ~ enlarge ~ FIGURE 1 Commercial development of state-funded R&D organizations.

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Page 106 STRUCTURES TO PROMOTE BUSINESS There are two requirements for market oriented R&D institutions— commercial capabilities and a structure that reflects the market. The first stage of development is the creation of a commercial department in the organization or, for larger organizations, in each division. The commercial department looks out for the needs of the customers and supplies information to the R&D, product development, and operations functions in the organization. The second stage is the restructuring of the divisional structure to match the simplest groups of customers. Restrictions on non-R&D activities in the institution often mean that management of intellectual property and operations relating to commercial contracts have to be carried out outside the institution in separate legal entities. Figure 2 shows a typical commercial structure for a medium-sized R&D organization. This model structure shows that federal budgetary links are entirely separated from the commercial activities, except that IP developed with federal funding is used in the commercial activities. One important decision is which of the required commercial capabilities are kept in the organization and which are purchased either from the local innovation infrastructure or private consultants. Exploitation of IP can be either direct licensing or sales to a customer, exploitation in a subsidiary or a joint ~ enlarge ~ FIGURE 2 Schematic view of a model commercial structure for an R&D institution.

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Page 107 venture (JV), or by spinning off a separate company together with staff. The choice of which route depends on the desire to maintain the links and the commercial benefits of each option. Where production is involved, it is important not to be too ambitious if there is little experience in the institute and it is better to make a joint venture with an organization with the right track record. Sales or licensing of the technology is often not the route that gives the highest return, but it can have the lowest risk. Table 1 outlines the various options. In the project, production joint ventures were chosen as the correct route. In the other cases the technology was exploited in subsidiaries or separate spin-off companies. In no case was a decision made to exploit via licensing or sale of the technology, although one of the institutions had used that as the main route to market in the past. In two cases in the project, R&D institutions decided to set up formal legal partnerships with other institutions and private companies. In each case there was a different reason. In one case it was protection against competition and price erosion. Three institutes decided to create a national center to promote the market (which was underdeveloped), share resources, skills, and facilities, and hopefully pull in other players to strengthen the position in Russia for export markets. In the other case the partnership pulled together a lead institute with a major university to ensure that students gained actual experience and were properly trained in a new area. Private business also took part and gained resources from the institute and the university, who in return gained extra funding. Part of this partnership was the formation of a national training center in the subject. TABLE 1 Options for Exploiting Intellectual Property Option Indication Exploitation within institute, but consider separate sales company Use of facilities that rely on continuing federal support Subsidiary When business is linked to main activities and new staff must be recruited Separate company with service and/or equity link When a nonstate company is needed for investment or financial management purposes Joint venture When a partner is needed for production or distribution Sale of technology to an unconnected company When there is no desire to be involved in production or sales Spin-off with no connection Small-sized business where the returns are not worth the costs involved in making charges

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Page 108 OTHER FACTORS There are two other issues that are important in controlling the potential for development—the legal and tax environment and issues relating to the location. Unfortunately the legal and tax environment is not very clear. Several of the main laws relating to science cities and R&D are in conflict. Regulations on taxation on R&D institutions and the transfer of payments for rent and services tend to discourage commercial activities apart from contract research. Also, export duties on certain goods and government constraints on strategic materials and equipment are disincentives. All these areas need attention, and where there is a priority for the development of a nuclear city, specific incentives need to be put in place. A special area is the legislation on intellectual property ownership. The legacy from the time of the Soviet Union is a set of laws that worked well then but are no longer consistent on the conflicting rights of the author, the originating institute, and the funding body. Preferably the originating body needs to be given clarity and the option to make a clear legal contract with the authors and the funding body on how they will benefit, if at all. The validity of Russian patents overseas is very tenuous, and in some countries, proving first discovery is difficult and, in some cases, unfair towards countries like Russia. The cost of worldwide patenting is usually prohibitive and a burden on institutions. A fund to help in this area would be one solution. Finally, there is the question of the city environment. In some cities like Obninsk and Troitsk, the large R&D centers are closed, but the cities themselves are open. Businesses outside the fences of these nuclear centers can be easily accessed. In closed nuclear cities, the lack of easy access is a problem that needs to have a solution if commerce is to flourish. Unless new technology businesses are linked into the wider business sphere, business will not grow and particularly foreign investment will not be gained. The solution is an administrative one and will involve a separation of the military and civil activities and the creation of a business park separate from the main city. There is also the question of coherence and branding. In cities of the Tacis project, some degree of coherence is starting to drive the development of business. In Koltsovo there is a clear cluster developing in the area of pharmaceuticals, biotechnology, food products, and cosmetics that is driven by the skills of the staff and former staff of Vector. Vector is now a brand that has some degree of recognition. Similarly in Obninsk, the original nuclear focus of the town has widened, and the various R&D institutions are driving a four-pointed set of commercial activities of radiation science, environmental problems, process industries, and energy. These are not so coherent as in Koltsovo but are

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Page 109 sufficiently so to allow benefits to be obtained. The Institute for Physics and Power Engineering (IPPE) is developing the FEI brand, and Obninsk needs to continue to encourage more coherency rather than less (see Figure 3). So far Reutov has concentrated on diversification rather than focus, but the areas of environmental products and information technology offer the basis for some future coherency with the original aerospace work. CONCLUSIONS Research and production organizations need to change their culture and internally reorganize to prepare for more effective commercial activity. The federally funded research base needs to be preserved as a source of technology for business development—in the absence of a university-based R&D activity. Research and production organizations need to be flexible and imaginative in the types of commercial activities they develop. The town should look for some coherency of business to stimulate cooperation between organizations and attract industry. The establishment of a city brand should be considered based on the common science and technology activities. Innovation activities should also be part of an overall plan supported by an efficient infrastructure. ~ enlarge ~ FIGURE 3 Coherency of business in Obninsk driven by the subject areas of R&D institutions.

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Page 110 Intellectual property ownership needs to be clarified and simplified to the benefit of the originating institutions. PROJECT PUBLICATION Innovative Development of Territories in Russia and the European Union: Experience, Problems, and Outlook (in Russian) Vol. 1 The Science and Technology Potential of Russia and its Application. Vol. 2 The Practice of Economic Development of Territories: Experience in the European Union and Russia. Vol. 3 Commercial Development of Russian R&D Organizations. Vol. 4 Regions of High Concentration of Scientific and Technological Potential in Countries of the European Union. Vol. 5 Science Cities of Russia: From Methodology to Practice. Vol. 6 Problems and Future Development of Russian Territories with High Concentrations of Scientific and Technological Potential. Vol. 7 Science, Innovation, and Business: Anglo-Russian Glossary. Moscow 2001, Pub. ScanRus. Dual language HTML version of Vol. 3 available in CD-ROM form from juan.matthews@pera.com .